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A false silver lining for Abenomics

, May 31, 2016, 0 Comments

On the surface, recent economic news in Japan offers a silver lining for Abenomics. Despite the initial misgiving at the beginning of 2016, Japanese exports have maintained a moderately expansionary trend in the first 4 months of the year. As a result, industrial output may manage to achieve a small expansion in the first half of 2016.
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Meanwhile, the Japanese labor market continues to tighten. The unemployment rate is at 21 year low. There are more than two new job offers for every new job seeker. The tightening in the labor market seems to be leading to a modest upward pressure on wages. In the latest survey, the regular wage index was up 0.7% year on year. The 0.7% rise may seem low in a global context, but it is the highest growth rate in Japan in 16 years. Some may wonder if Abenomics may be in the process of achieving its goals, especially now that Prime Minister Abe decided to postpone the sales tax hike?

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In our view, such hope that Abenomics may eventually succeed despite taking longer than expected is a false silver lining. Postponing the sales tax hike merely prolongs the eventual reckoning that Abenomics has failed. As we illustrated in “A delay is not enough”, Abenomics did not deliver any meaningful structural reforms. There was no labor market deregulation. Womanomics was a charade. An improvement in the corporate governance was superficial. Pension and health care reforms were not even on the agenda. In our view, the lack of any meaningful reforms lets

Japanese households and corporate managers maintain their deflationary mindset they formed during the two decades long deflation, causing the Abenomics project to fail. Additional fiscal or monetary stimuli in 2016 may give a temporary boost to the Japanese economy, but it is unlikely to return the economy back towards the reflationary path.